Significant Decline in China's Trade with the US Amid Tariff Disputes

China's trade dynamics with the United States have taken a significant downturn as tensions between the two largest economies escalate. According to recent data from China's Customs Administration, both exports and imports have seen a dramatic drop, particularly in May. Exports to the U.S., measured in U.S. dollars, plummeted by 34.5% compared to the same month last year, while imports fell by 18.1%.

In mid-May, representatives from both countries reached an agreement to pause the escalating tariff conflict and substantially reduce tariffs on goods exchanged between the nations. However, ongoing discussions regarding trade issues are set to continue in London today, where high-ranking officials from both governments will convene.

Key issues still linger, such as China's export controls on critical industrial materials, including rare earth elements and magnets, in which it is the world's leading processor. Conversely, the U.S. has restricted the sale of advanced technologies, including design software for computer chips and essential aerospace components, which China heavily relies on from foreign sources.

Despite the downturn in trade with the U.S., China's overall external trade showed modest growth in May, with exports rising by 4.8% year-on-year. However, imports took a hit, declining by 3.4%. The trade surplus stood at approximately $103 billion, around EUR90 billion. These figures fell short of analysts' expectations, who had predicted a 5% increase in exports and a slight dip in imports.

The trade conflict has forced Chinese exporters to seek alternative markets, particularly in Europe. In May, exports to Germany surged by 21.5%, whereas imports from Germany decreased by 1.3%. This decline in imports highlights the weak domestic demand in China, exacerbating the challenging economic landscape for German businesses operating in the region.

Maximilian Butek, a senior official from the German Chamber of Commerce in China, noted that the decline in imports is indicative of a sluggish domestic market. He expressed concern over China's export controls on rare earth elements, stating that many German firms are awaiting critical export licenses to ensure their operations are not disrupted. Butek emphasized the urgent need for expedited approval processes to avoid production halts.

China continues to grapple with weak domestic demand, as evidenced by the consistent decline in imports. This situation is largely attributed to the country's industrial policies, which have led to overproduction in certain sectors, resulting in excess goods being sold at lower prices on international markets, particularly in the solar industry.

The subdued consumer spending in China can be linked to the repercussions of a prolonged real estate crisis, with many individuals having invested in properties that have depreciated in value, consequently dampening consumer confidence. Additionally, the broader economic challenges are compounded by deflationary pressures, with consumer prices reported to be 0.1% lower than the previous year. While deflation can stabilize prices for consumers, it poses risks to corporate profitability, potentially leading to wage cuts and job losses.